Introduction
As multinational enterprises (MNEs) expand, shared services become essential for achieving efficiency, scalability, and operational integration. Functions like HR, IT, finance, procurement, strategic planning, and marketing are increasingly centralized to reduce cost and ensure consistency across regions. But with this centralization comes a major transfer pricing challenge: How should shared resources across borders be priced, allocated, and justified under the arm’s-length principle?
The service industry faces significant scrutiny from tax authorities because shared services are intangible, difficult to measure, and often poorly documented. This article explains the key transfer pricing challenges in cross-border service arrangements and provides practical solutions for achieving compliance with OECD Guidelines.
1. Understanding Shared Services in the Service Industry
Shared services refer to centralized functions performed by one entity for the benefit of multiple group companies. Examples include:
IT support and cloud platforms
HR and recruitment services
Finance, accounting, and payroll
Legal and compliance services
Procurement and supply-chain support
Marketing, branding, and digital creative services
Strategic management and business planning
Because these services do not involve physical goods, their value must be justified through documentation and a strong benefit analysis.
2. Key Transfer Pricing Challenges in Cross-Border Services
1. Proving That a Service Was Actually Provided
A tax authority’s first question is often:
“Can you prove the service was delivered?”
Challenges include:
No tangible deliverables
No time logs or project records
Difficulty proving benefit received
Lack of clear scope
2. Distinguishing Shareholder vs. Group Services
Many service activities fall into the “shareholder activity” category — and cannot be charged.
Examples of shareholder activities:
Board oversight
Capital restructuring
Investor reporting
Global consolidation reporting
Authorities reject charges for these unless they benefit the subsidiary directly.
3. Choosing the Right Cost Allocation Key
Shared services require allocating costs across multiple recipients, which creates challenges:
Using arbitrary or inconsistent keys
Selecting a key that does not reflect expected benefits
Poor documentation of allocation rationale
4. Pricing Services at Arm’s Length
Service pricing must align with:
CUP (direct comparables)
Cost-Plus method
Low-Value-Adding Services (LVAS) 5% markup (if applicable per OECD rules)
Incorrect pricing is one of the top drivers of TP adjustments.
5. Lack of Intercompany Agreements
Without strong contracts, tax authorities assume the charges are:
Unjustified
Duplicative
Non-beneficial
Artificial profit shifting
3. Practical Solutions for Handling Shared Resources Across Borders
Solution 1: Start with a Thorough FAR and Benefit Analysis
For each service:
Define the function performed
Identify assets used (software, tools, platforms)
Determine who bears risks
Document the benefit to each recipient
Clear evidence includes:
Emails
Reports
Project deliverables
Systems access logs
Meeting notes
Tickets from IT/helpdesk systems
Solution 2: Classify Services Accurately
Break services into categories:
Operational services (chargeable)
Administrative services (chargeable)
Shareholder services (non-chargeable)
Duplicated services (non-chargeable)
Accurate classification ensures correct pricing.
Solution 3: Choose the Right Allocation Key
Allocation must reflect expected benefit.
Strong allocation keys include:
Number of users (IT)
Headcount (HR or admin services)
Revenue (strategic or management services)
Purchase volume (procurement services)
System usage metrics
A good allocation key is:
Logical
Documented
Consistent across the group
Solution 4: Apply OECD LVAS (Low-Value-Adding Services) When Possible
If the service qualifies as low-value:
Routine in nature
Non-core
No significant risks
No unique intangibles
Then OECD allows:
Simplified cost allocation
Fixed 5% markup
Simplified documentation
This reduces audit exposure significantly.
Solution 5: Price Using Cost-Plus or CUP
Cost-Plus Method
Total cost + arm’s-length markup
Most common for shared services
CUP Method
When direct comparable prices exist — for example:
Market-based cloud hosting fees
Outsourced HR services
IT services from independent vendors
Solution 6: Implement Strong Intercompany Agreements
Contracts must include:
Scope of services
Cost structure
Allocation methods
Markup
Responsibilities
Evidence requirements
Billing cycles
Contracts that mirror real-world behavior are essential during audits.
Solution 7: Review Services Annually
Annual updates should reflect:
Expansion or reduction of services
Changes in headcount or usage
New systems or shared platforms
Updated cost pools
Revised allocation keys
4. Documentation Requirements
For defensibility, your audit file must include:
✔ Service descriptions
✔ Evidence of benefit
✔ Cost pool details
✔ Allocation keys and justification
✔ Pricing rationale
✔ Benchmarking (if Cost-Plus markup is applied)
✔ Intercompany agreements
✔ Proof of service delivery
✔ Annual reconciliation and true-ups
Missing documentation is the #1 cause of TP adjustments in the service industry.
5. Red Flags for Tax Authorities
Authorities often challenge cases where:
The subsidiary claims no need for the service
Services appear duplicative
Charges include shareholder activities
Markups are excessive
Allocation keys are unclear
The charge is based on vague or unjustified percentages
No evidence of benefit exists
Conclusion
In the service industry, transfer pricing is more complex because services are intangible, cross-border, and often centralized. To remain compliant, multinational enterprises must document services thoroughly, apply logical allocation keys, and use defensible pricing methods grounded in OECD guidance. When handled properly, shared services can reduce cost, increase efficiency, and support global business expansion — all while remaining fully compliant with transfer pricing regulations.
